2013 already began with a storm, but let’s see what did not happen in 2012, a year that saw big events, but also the lack of them – a lack of major disasters that resulted in a lack of volatility.
Will they happen in 2012? Or will growth replace crises and create volatility driven by positive things?
* This article is part of the January 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
1) Greece did NOT leave the euro-zone
The debt struck country muddled through the biggest debt restructuring in history (PSI), saw two consecutive rounds of elections and an ongoing crisis before it received the tranches of aid. Greek citizens suffered badly, with unemployment reaching 26%, and the recession turning into a de-facto depression.
Will Greece leave the euro-zone in 2013? It depends on mostly on Germany – the political will to keep Greece in the zone surprised many, but the next stage will require the political will to turn into direct cash: the next debt forgiveness of from Greece will come from loans made to it from the European Union. Only few people believe that Greece will not require more debt forgiveness.  This means that money lent from Germany will be actually transferred to Greece. This political hurdle is huge.
2) Spain did NOT ask for a bailout
Spanish yields reached “bailout levels†but retreated. Spain can thank Mario Draghi for this: his words in July changed the picture. He committed the ECB to do everything to preserve the euro, “and believe me, it will be enoughâ€. Since then, Draghi backed up his words with the OMT: a program to buy bonds, based on an approved bailout request.
Spain hesitated to be chained to the austerity path and the “Men in Blackâ€. So far, this tactic has proved itself: the OMT served as a big bazooka and wasn’t used so far. Spanish yields continue falling. Spain is far from being saved, with an ongoing banking crisis and an unemployment rate of over 25%. Nevertheless, the crisis in the financial markets is currently distant, and a bailout is far – Low yields = no bailout.
What will happen in 2013 with Spain? Without growth, Spain could still drag the euro down. Hopefully, the bleeding will stop and Spain will see bond yields drop thanks to growth and not thanks to bazookas.
3) Bernanke Did Not Pause Near the Printing Press
Does more quantitative easing really help the economy? This doubt was cast by many, including in this corner. Buying more bonds when yields are already very low didn’t make any sense. How can it encourage lending? Nevertheless, as the unemployment rate fell only slowly and as the Fed wanted to create a “wealth effectâ€, Bernanke did it again.
In September, the Fed announced QE3, or “QE-Infinityâ€, an open ended monthly program to buy Mortgage Based Securities. After a pause before the elections, the Fed took much bigger steps in December: open ended monthly buys of treasuries (QE4). $85 billion are printed each month. Contrary to QE1, QE2, Operation Twist 1 and 2, the current policy is totally open ended.
Also the guideline for low interest rates, first introduced in 2011, has been changed to an open ended one: the time limit has been removed, and instead, lower rates depend on a lower unemployment rate and contained inflation.
Given the political problems in Washington, Bernanke’s urge to act seems understandable.
